A real estate investor obtained a federally-related adjustable rate mortgage (ARM) loan from a lender to fund the purchase and refurbishment of a single-family residence (SFR) to rent or sell, not to occupy as a principal residence. The investor made loan payments which the lender applied to the wrong loan. This caused the loan secured by the SFR to be treated as delinquent. Foreclosure was commenced for lack of ability to effectively communicate with the lender’s numerous separate departments. The lender reported the delinquency and foreclosure to credit bureaus, damaging the investor’s credit. This caused other lenders to deny funding for the investor’s SFR purchases and refinancing necessary for his real estate investment operations. As a result, his investment operation collapsed, inflicting losses. The investor sought to recover his investment losses due to the damage to his credit score caused by the lender’s reporting, claiming the lender failed to comply with lender regulations under the Real Estate Settlement Procedures Act (RESPA). The lender claimed the investor had no RESPA protection for the investor’s losses since RESPA does not apply to loans made for the purposes of funding the acquisition or improvement of SFR properties to be used for renting or selling, rather than for occupation by the owner. A federal court of appeals held the lender was not liable under RESPA for the investor’s losses due to the reporting of the delinquency, foreclosure proceedings and resulting credit damage since any federally-related mortgage loan secured by SFR property and originated for renting or selling is a loan for business purposes and thus not controlled by RESPA. [Johnson v. Wells Fargo Home Mortgage Inc. (2011)_F3d_]

Editor’s note – Attention, mortgage loan brokers (MLB) who are not mortgage loan originators, not certified by the Nationwide Mortgage Licensing System (NMLS) or not endorsed by the Department of Real Estate (DRE): you need to remember which single family residence (SFR) loans are protected by the Real Estate Settlement Procedures Act (RESPA) and which are not. Here is the breakdown.

RESPA covers all federally-related loans, which include all loans funding the acquisition of one-to-four unit SFRs to be occupied or improved as the principal residence of the owner. However, there are SFR loans exempt from RESPA coverage. Exemptions defined in Regulation Z (a regulation which implements the Truth in Lending Act) point out one of the differences between a RESPA-covered loan and a non-RESPA-covered loan: the purpose for which the loan funding is used.

RESPA-covered loans fund the acquisition of an SFR or a duplex to be occupied as the principal residence of the owner. This is a consumer purpose. Non-RESPA-covered loans fund the acquisition, improvement or maintenance of a non-owner-occupied SFR property for a business purpose, such as renting and selling by the investor in the case of Johnson v. Wells Fargo. However, even owner-occupied SFR property may not be covered by RESPA – if it is a triplex or contains more than four housing units, it is deemed a business purpose. [24 CFR §3500.5]